By Lukman Otunuga, Research Analyst at FXTM
Investors were thrown onto an emotional rollercoaster ride Tuesday evening as Sterling rallied across the board despite Theresa May’s historic Brexit defeat in the House of Commons.
Expectations were initially elevated over the Pound witnessing downside shocks in the event of PM May losing by more than 100 votes. However, bulls were clearly in the driver’s seat with the Pound rebounding against the Dollar after the Prime Minister lost by a record margin of 230 votes.
A logical explanation behind the appreciation could be based on the fact that the defeat in the Commons was already heavily priced in. With speculation in the air over May’s overwhelming defeat potentially reducing the probability of a no-deal scenario, Sterling is likely to find near-term support, and this was reflected in price action Wednesday morning.
It is too early for celebration, especially when considering how Theresa May will be facing a vote of no-confidence initiated by Labour Wednesday evening. The Pound may find some short-term stability if the Prime Minister is able to survive the no-confidence vote, as this outcome removes some element of uncertainty. A situation where the government loses the vote will be detrimental to the Pound because it increases the likelihood of an early general election.
The truth of the matter is that uncertainty remains a major theme with the outcome of the no-confidence vote open to question. With the chance of extending Article 50 increasing by the day, growing speculation around Theresa May seeking further concessions from the EU and expectations floating around about a second referendum – Pound volatility is in the cards.
Away from Brexit and politics, the UK inflation report is scheduled to be released Wednesday with inflation expected to have declined 2.1% in December. The market reaction to the inflation report is likely to be muted as investors focus on Brexit.
As regards the technical picture, the GBPUSD’s trajectory will be heavily dictated by how the no-confidence vote against Theresa May plays out. A technical break above 1.2920 is likely to encourage a move higher towards the psychological 1.3000 level.
Dollar fights back… but for how long?
Across the Atlantic, the Dollar fought back against a basket of major currencies with prices trading around 96.00 in early trades.
The upside potential feels limited, especially when considering how the fundamental themes weighing on the currency remain present. Mixed domestic economic data, dovish comments from Fed officials and growing speculation over the central bank taking a pause in monetary policy tightening this year will continue weighing on the Dollar.
Investor appetite towards the Greenback is seen diminishing even further if soft economic data questions its safe-haven status. Sellers still have an opportunity to reclaim control if 96.00 proves to be a stubborn resistance level.
Gold searches for spark
It is becoming increasingly clear that Gold is waiting for a fresh catalyst to make its next major move. The yellow metal continues to trade within a range with resistance around $1,296 and support at $1,280.
A break above $1,296 will open the gates towards the psychological $1,300 level and beyond. On the other hand, weakness below $1,280 is seen triggering a decline back towards $1,272.
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